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It’s been a month or so since the American economy went into full-scale lockdown mode, and already we’re hearing stories of small and local businesses closing down and going out of business, more than 3 million Americans applying for unemployment insurance, hourly workers having trouble making monthly bill payments, and just about everyone connected to the American economy being negatively impacted in some way. Fast forward to summer 2020, and we could be facing an epic credit problem, the likes of which we haven’t seen since 1929. So what emerging new technologies might be able to give Americans a lifeline for their economic future?
Blockchain technology beyond Bitcoin
One of the most promising technologies is blockchain technology, which has already been hailed as a way to make the financial system more efficient, more transparent, and safe from fraudsters and scammers. You probably know blockchain best as the basis for Bitcoin and other cryptocurrencies, but the potential applications for blockchain extend far beyond crypto to include things like financial contracts for just about any asset class. Using blockchain, for example, it’s now possible to write “smart contracts” without the need for third parties for each transaction.
And now comes an entirely new idea that might help solve America’s future credit nightmare: a blockchain-based credit scoring system that would be far superior to the credit scoring system we have now. Right now, the only real way to boost your credit score is by taking on debt (especially credit card debt!), and then showing lenders that you can pay back that debt responsibly. If you have a stellar repayment history, you get rewarded with a higher credit score and even more opportunities to take on more and more debt. (See how things work?) But you don’t get rewarded for, say, paying your phone bill on time each month, or for taking other actions that would “signal” that you are a good credit risk for lenders.
That’s where blockchain technology comes into the picture here – it essentially creates a decentralized, transparent and immutable ledger of financial transactions. Put into layman’s terms, it means that transactions can never be altered, and that everyone can clearly see what you did (although your identity remains anonymous). In such a way, the Bitcoin blockchain maintains a running global tally of who owns Bitcoin, and also records every single transaction made to trade Bitcoin. And Bitcoin is decentralized, so no government or central bank entity (such as the Federal Reserve) can control it.
What this means in credit terms is that it might be possible to create a sort of “alternative” credit scoring system, in which you are rewarded for nontraditional factors, and that would NOT be controlled by the big credit card companies. If you pay your phone bill on time, for example, that would become an entry into your personal financial blockchain. If you make a rental or mortgage payment on time, that might be another entry into your blockchain. At some point, you would be able to show this blockchain to potential lenders in order to show them that you are creditworthy. Your Experian or Equifax credit score might be dismal, but your blockchain credit score would be amazing. Moreover, since blockchain ledgers are immutable, it means hackers and fraudsters wouldn’t be able to abuse this system or hack your identity.
Perils and pitfalls
Of course, there are some big watch-outs here. One of the most glaring watch-outs is that such a blockchain-based credit scoring system might be transformed into the type of social credit system they already have in China. In China, the state uses this social credit system to monitor citizens, and to close off access to certain services for people it deems unworthy. For example, if you post a negative social media update about the government, that would likely lower your social credit score. Do this too often, and you might not be able to board airplanes or rent an apartment. In extreme cases, the government might be able to turn off access to financing entirely. This sounds like the 2016 “Nosedive” episode from “Black Mirror” but it is very much a reality.
No doubt, the coronavirus pandemic will cause a lot of pain, suffering and dislocation – not just medically, but also financially. New innovations like blockchain technology might offer new opportunities for tens of millions of Americans to get their life back in order financially and get access to credit when they need it.